Podcast Episode 39: Don’t Be Too Sure | Remembering Nortel

We’re taking a walk back in time to cover some of those moments when people were really really sure about something to see how that all played out for them. This time we’re talking about Nortel which, as it turns out, is a bit player in Josh’s origin story!

Episode Transcript

BARENAKED MONEY PODCAST: EPISODE 39

Don’t Be Too Sure | Remembering Nortel

Announcer:
You’re about to get lucky with the Barenaked Money Podcast. The show that gives you the naked truth about personal finance with your hosts, Josh Sheluk and Colin White, portfolio managers with WLWP Wealth Planners, iA Private Wealth.

Colin White:
Well, welcome to the next episode of Barenaked Money, where all things naked and money are discussed. And you got Josh and Colin with you here this time around. And we’re going to go for a little bit of a walk because I personally have had a lot of people in my office who are really sure about things over the last little while and it’s caused me to reflect over my 30 year career about but all the different times that people have been sure about things and how that’s turned out.

Colin White:
And the good ones everybody remembers. Some of the bad outcomes. So I thought we go back and take a look at some of the times that a lot of people were really sure about things and I’m sure people on this call had been sure about some of these things and how it’s played out.

Colin White:
So, one of the companies we’ll be discussing is the Nortel saga, because that is one that is very big and many people should remember, if not we will remind you these things. And we’ll also go off to a few other examples just by way of explaining why we’re maybe not as sure about things as some of the people around us. So Josh, were you born when Nortel was a thing?

Josh Sheluk:
This is going to be a fascinating conversation for me because it definitely wasn’t part of my career, the whole Nortel saga. But I was just starting to get a little bit interested in investing at the time when, not when Nortel was going up, but when it was coming down and I used to look at the ticker on CP 24 every day, which is like the local news channel and I used to look at it every day and I saw this Nortel thing go from 120 to 110 to 100 to 90 to 80. And I was like, “Dad, what’s going on with this Nortel company, should I buy it? But yeah, fascinating story and I think a lot of lessons to be learned from it.

Colin White:
Well, exactly. So again, we’ve got people and again, there’s all kinds of commonly held beliefs out there whether it’s with regards to the Canadian banks or you work for a specific company and you own shares in that company. And we have this out sized confidence, things are always good and always going to be good. And we’re just trying to maybe remind people that there’s been a few times in the past where you felt this way and things didn’t turn out as good.

Colin White:
And this is not by way of saying any of the ideas being discussed now are bad, like again a Canadian bank investment. Our position is that’s not bad, it’s just maybe not the be all an end all. And if you’re working for a company, that may be a good company but it may not be a good company forever.

Colin White:
And so these are designed to maybe help people put things in more perspective and consider the risk aspect to what they’re doing a little better. So, Josh I’ll go back even further than Nortel and this probably way predates you. Because again, back in the day when we didn’t have the internet, we listened to investment presentations that people talk about things. And there’s a company that was called Radio Shack.

Colin White:
And for a while, over 85% of the population of north America lived within 10 minutes of a Radio Shack. And they were just a wonderful investment because it was consumer electronics and they had such a deep market penetration and a network that nobody else could ever hope to catch up to. And they were going to be a great investment for the turn because they were going to be able to morph their shelf and they’d be able to add things as technology changed but nobody could ever assail their access to the population. That was the investment thesis. Do you remember Radio Shack Josh?

Josh Sheluk:
Yeah. I got a remote control monster truck from Radio Shack. I think I must have been… I don’t know, six, seven, something like that. So do I remember it? Yes. Do I remember it as an investment? No, I do not.

Colin White:
Yeah. Well then there’s a memo that came out not that long ago, that actually there was a Radio Shack flyer and literally everything in the flyer was now contained on your cell phone. There was no functionality on anything that they had in this entire flyer that you could not do with a current cellphone. So maybe I’ve gone back too far. Maybe not. Everybody’s going to remember Radio Shack, but I don’t even think they’re around today.

Josh Sheluk:
Well, when you mentioned how many stores they had and how everybody was in proximity, it made me think of Blockbuster.

Colin White:
Another great story. Actually blockbuster existed from 1985 till 2000. There’s still one Blockbuster going I hear, because I watched a documentary on it but I think as a chain, they ceased in 2010. And my brother-in-law actually ran a Blockbuster for a lot of years and boy I tell you, if you worked at a Blockbuster you were cool and everybody wanted to know you. And that was a big deal too.

Josh Sheluk:
So why don’t you give me a bit of the Nortel story as you saw it. A firsthand perspective. And we’ll keep it concise because we don’t have all day. I’m sure we could talk all day about this but I’m interested to know how you experienced it being somebody in the business, in the industry, from the point where it was a nothing company to a massive company or massive story to again, it was a nothing company.

Colin White:
Well the history of Nortel, if you actually go back through its pedigree, stretches back into the 1800s because it has roots that go back to some of the first telecommunications’ equipment that was produced. So they were largely seen as kind of utility, like basically the phone company that also had a pretty, seemingly very sexy adaptation of all this new digital stuff. They went digital back in 1975. It’s like oh my God, that’s so leading edge.

Colin White:
So there was this belief. They were treated as if they were the phone company, the utility, the ubiquitous, they’re everywhere, everybody’s always going to need them, they’re on the cutting edge, they’re making all these investments.

Colin White:
And everybody was looking at it as it’s just always going to be there. And at its peak, it represented 37% of the TSX. Now Josh, have you ever seen a single company dominate any index in anywhere in the world in all of your vast experience? Have you ever seen that?

Josh Sheluk:
I haven’t. I’m sure there are some examples from some less developed countries at some point along the way, but it is absolutely mind-blowing for anybody today. Especially somebody like me that didn’t live through that, to go back and think that something like that could happen and something that made like that made sense.

Josh Sheluk:
Because there are so many massive companies today that just represent a small fraction of the stock market that they’re a part of. And to say that something was so… Just to put this in perspective for people. Out of all the large publicly traded companies in Canada, Nortel was worth one third or put another way, all of the other companies combined in Canada were worth twice as much as Nortel as a single company.

Colin White:
Yeah. And so today, what is the percentage of the entire TSX that is the financial industry? What’s that percentage?

Josh Sheluk:
It’s right around that level off the top of my head. I don’t know the exact amount, but probably between 35 and 40%.

Colin White:
Yeah, exactly. So Nortel was basically as big as the whole financial industry of Canada at the time and everybody was okay with that because well, they were a technology leader, and it’s only going to go up from here.

Josh Sheluk:
So, that was going to be one of my questions for you. You say everyone was okay with it. At the time did people reflect on that and think that this is absolutely insane?

Colin White:
Oh, there’s always crazy people in the room, but you don’t listen to the crazy people. This is always going to go up. No, the issue with Nortel is that it was seen largely, by much of the investing public that I was dealing with at the time, as a utility. Basically they associated like this is the phone company. It’s never going to do badly. It’s just so entrenched and these companies are always safe and these guys are even better because they’re chasing all this technology.

Colin White:
I remember one of the stories, this is where I kind of really started to doubt what they were up to, they spent a billion dollars buying a plant. I think it was in Switzerland somewhere. And they shut it down and sold it off for scrap within 30 days. I’m going, holy crap. That kind of flawed decision making, there’s something not going well there.

Colin White:
But the interesting thing for me was watching, and this is what I reflect on today when I have somebody in my office talking how sure they are that a company or an [inaudible 00:08:56] thing is absolutely pilot rock solid is always going to do well, I go back, boy those are awful familiar conversations. I mean Nortel’s share price peaked at, what was it 124 something? 124, 15th of July, 2000. So that was the journey of the tech wreck.

Colin White:
So one of the reasons Nortel, I think, gained the position it did was it was kind of a crossover. It was an old company with roots back to the 1800s in telecommunication and it was doing this technology stuff. Like, oh my God, this is going to give me the stability of a utility and I’m going to get all the upside of technology. This is wonderful. So it peaked in July of 2000, but the whole way up people were just buy more, I’m going to buy more. It’s always going to go up.

Colin White:
Oh my God, did you hear what they did? They bought a plant over in Europe. They’re expanding, they’ve got this technology nobody else has, they’ve got the infrastructure. 93,000 people work for them. And that’s the other side of the story because the 93,000 people working there had a pension plan that was largely invested in Nortel stock. An individual share purchase plan.

Colin White:
So everybody was on this gravy train and at a certain point, it reaches a tipping point where everybody is drinking the Kool-Aid and we all have to believe this because we’ve all made decisions and if this has to work out, yes. So it kind of marched in lockstep with the tech wreck, the internet stocks in 2000. But if you walked into somebody and said, “No, we should sell off some of our Nortel stock.” Why would I do that? It’s my best performing investment. Josh, has anybody ever said that to you, when you’ve suggested selling something, and they say, “No. I shouldn’t sell that, that’s my best performing investment?”

Josh Sheluk:
Yeah. Yeah. Way too often. So I was… In the postmortem, I was just reading about it. Apparently they had, in their headquarters here in Ontario, they had the stock price just flashing on the wall basically all day, every day which kind of drives that infatuation and that just pure focus on the shared price the whole time that you’re talking about.

Josh Sheluk:
But this is something I wanted to ask as well. Are there any situations today, when you look out in the market and the scope of different investments that are out there, are there any today that remind you not to say that they are going to be the next Nortel, but are there any that the sort of the stories behind them, they remind you a little bit of the Nortel story?

Colin White:
Because of the scope and scale that Nortel got to, again about 37% of the index, I don’t think there’s anything else out there that approaches the mania, universal mania, that gripped Canada at the time. I think there’s probably stories that are similar, but they’re not getting the same kind of [inaudible 00:11:46] that this particular story got.

Colin White:
For me, the similarity is watching the certainty of how people behaved at the time and watching people behave with certainty now. And trying to dissuade them from being so certain. And again, there was definitely a place in people’s portfolio to hold Nortel back when it was doing well and the earnings numbers were good and stuff, to have some exposure to it.

Colin White:
But the true tragedy was that people got so infatuated with it, that it became a dominant piece. They’re holding their portfolio and their portfolio’s already 37% Nortel and they go, “Oh, I’m going to buy some Nortel shares.” No. Just don’t. You’re overloading it. So, I can’t give you a really good example of something I say, “Yeah, this company looks the same,” because again, it’s just an order of magnitude that made it so different and so tragic and special.

Josh Sheluk:
Sure. Right. Now you also mentioned the question for me, have you had anybody come up to you that says, “Oh, why would I sell that, that’s my best performing investment?” Do you have stories at the time, from clients that didn’t sell Nortel for one reason or the other and what was the common refrain for them back then?

Colin White:
Well, it was classic. When it was on the way up and everybody held it and it was, well I can’t sell it’s my best performing investment. So you see a pullback. A pullback from 124 down to 120 bucks.

Colin White:
It’s like, “Okay, it looks like it’s getting a little bit weaker, so let’s sell some.”

Colin White:
It’s like, “Oh no. I can’t sell until it goes back to 124.”

Colin White:
“What?”

Colin White:
“Well, obviously it’s going to go back there, when it gets back there then I’ll sell some.”

Colin White:
“Okay.”

Colin White:
And then it drops down to 115 and it’s like, “All right, well it’s getting riskier.”

Colin White:
He’s like, “Oh no. I can’t sell it at this much of a loss.”

Colin White:
And most of them wasn’t even a loss, it was they just hadn’t gained as much. And he was like, “It has to go back to it.” You talk to them at 115 it was like, when it goes back to 120 I’ll sell some of it.

Colin White:
“What basis are you…”

Colin White:
“Well it was 120, therefore it will be 120, therefore I will wait.”

Colin White:
And that was all of the effort that was put into it. And then it keeps going. And every time it dropped, people would, “As soon as it goes back to, I’ll get out.” Again, it’s described as the endowment effect. Once you have something, you value it more than what somebody else will value it at and you get caught up in that. And if you don’t break that cycle, you never find an exit point.

Colin White:
And this comes back to what we talk about, having a methodology on making these decisions. What’s your sell discipline? And if your sell discipline is as soon as it goes back to this, I’m going to sell it. That’s not a cell discipline. That’s a sell emotion and that’s going to cause the problem.

Colin White:
So on the way up it was like, “Well, I’m not going to sell it because it’s my best performing investment, therefore it’s always going to be my best performing investment.” And then when it pulled back a little bit it’s like, “Well, as soon as it goes back to I’ll sell it. And I watched people ride that all the way to zero.

Josh Sheluk:
Yeah.

Colin White:
After a certain point they kind of throw their hands up and go, “Well, it’s only 20 bucks a share. I mean, why would I bother selling it?” It’s like, “All right, fine. I give up.”

Josh Sheluk:
Hear that a lot too. Yep. And the shares of Nortel that are littered in some of our clients’ accounts still today is a reminder of how dangerous that type of thinking can be. Now there’s one that comes up for me a lot today, especially with some of these again, technology companies that have run up so much, banks to some extent as well, because a lot of Canadians hold their bank shares very dearly. The tax thing. They don’t want to sell their position because it would cost them tax. Did you have any of these [inaudible 00:15:36] scenarios back then?

Colin White:
Huge. I have that conversation all the time and this is where I really get glib with people. It’s like, “All right, all right. Listen, you got to let me win. If I make you money, it’s going to cost you tax. You have to like that because the alternative is I lose you money. You won’t have to pay any tax, but I’ve lost your money. So you need to pick one of those because those are the two outcomes of working together.”

Colin White:
And that’s just it. People say, “Well I don’t want to cash those. I don’t want to pay the tax.” It’s like, “Stop it. That’s not an investment decision.” I mean yes, tax planning is a thing and we will and we do with our clients, work on how to trigger taxes in an efficient way over time. But at no point do we ever say, no we can’t sell that because we’re going to have to pay tax on it. If it’s a bad investment or your portfolio’s not set up properly for risk management or properly diversified. That’s a [inaudible 00:16:28].

Colin White:
If you sit there and are paralyzed by not wanting to sell because you’re going to pay taxes… Well, what are you hoping for? Are you hoping that the investment falls so the tax problem goes away? Because it’ll be only two things. Either you’re going to pay the tax or you’re going to hold the investment until it crashes and then not have to pay the tax. And I don’t think that’s a win.

Josh Sheluk:
Yeah. Or you hold it and it keeps going up and you pay more tax so it’s kind of a no win situation. You got to let us win some way.

Colin White:
Well, it’s the tax tail wagging the dog. The taxes are a thing. Should you minimize them? Yes. Do you want to take reasonable steps? But is one of the reasonable steps to dramatically skew your portfolio in sub-optimal investments for tax planning. No, you lost the plot. The whole idea in investing money is to make money and if you make money, you’re probably going to have to pay a little bit of tax.

Josh Sheluk:
Yeah. Now you also mentioned the idea that a lot of people that worked at Nortel, they also owned shares in Nortel. And this is something that I know drives you crazy is having too much of your personal net worth also tied up in a business that you’re working in. Because that I guess, it’s not traditional diversification but diversification in some sense, that you don’t want all of the financial outcomes in your life tied to the same thing.

Colin White:
When you work for Coke, own shares in Pepsi. Just stop it. If you’re working for a company that’s a really good company, your career’s going to go really well. Take every nickel they pay you in compensation and get it out. Go put it. There are 38,000 publicly listed securities on the globe. Your company’s one of them. Stop it. It shouldn’t represent 80% or 60% or 20% of your own wealth for any period of time.

Colin White:
There’s just too many black swan events. I mean, we’re going through a global pandemic now which has completely wiped out share values in some businesses that may never, or will never come back. And is that foreseeable? No, it isn’t? Just no. The only way to protect yourself against these major events or unseen or unexpected events is diversification. But it’s availability bias.

Colin White:
I understand this company. I listen to what they say. I am proud of this company. Everybody around me is plugged into this company. We all think it’s going well. All this information’s available to me. I’m immersed in it. I’m comfortable with it. I don’t understand investing. I don’t understand stock markets. I don’t understand when my financial guy starts to talk gobbledy-gook.

Colin White:
I don’t understand but I understand my company. Therefore, that’s what I invest in. Then all the people around me are doing the same thing, so I have a tribe. And we’re all going to talk about it. On lunch breaks we’re going to talk about it. We go to the barbecue at the weekend, we’re going to talk about it. And this is really going to work for me. But it’s just taking on unnecessary risk. And again, you guys have examples in Ontario down here, where you’ve got the northern pulp mill shuts down, all of a sudden the pension’s underfunded. What are they going to do with that?

Colin White:
You can go through Sears, you can go through Hudson’s Bay. You’ve got all these major companies shutting down and the pensions are in trouble. Right? So again, if you work somewhere and your only retirement asset’s the pension, then the company fails, your pension’s not rock solid.

Colin White:
And people have an impression that the government’s going to bail out all these pensions. Well they can’t and it won’t. And that’s not how it works. So you have a great career, you make 35 years so you get your 70% pension, you think you’re… And you’ve participated in the share purchase program. You’re set. Please don’t do that.

Josh Sheluk:
Yeah. It could be a bit of a triple whammy. Not just a double whammy a triple whammy, if you have not only your job, so you lose your job because the company’s going bad. Your ownership of the shares of the company are plummeting. The value. And then your pension’s compromised as well. So this is notwithstanding the employee stop purchase plans that a lot of these companies have. They can be valuable.

Josh Sheluk:
There’s basically free money there if you’re contributing and purchasing the shares of your company. I think your point Colin, is that you don’t want to have too much of your wealth tied up in this and if you’re able to get some of the free money that they’re given out from owning the shares, awesome. Periodically review that and take some chips off the table when you need to.

Colin White:
Yep. No, you can put me as a 100% in favor of free money and you should take all the free money offered, but just liberate that money as quickly as you can.

Josh Sheluk:
Keep it free.

Colin White:
Exactly.

Josh Sheluk:
Yeah.

Colin White:
Keep it free.

Josh Sheluk:
So I got a couple great snippets from an article that I was just reading from the Globe written back in 2001. And the first three paragraphs of this article I just thought were so great, because they encapsulate what happens so often when you see a former high flying company come back a bit, come back to earth in terms of its share price. So I’m just going to read you quickly these few words here.

Josh Sheluk:
“The market seems to be in a forgiving mood these days. Nortel Networks Corp. The lightning rod of investor anger over much of the past year has surged recently. Riding the fresh wave of optimism washing through the shelled out technology sector. Analysts are starting to stamp strong buy ratings on the stock again and Nortel’s new CEO believes the company has found the bottom now that it has escaped a potential financial crisis. While the stock is trading hands at one 10th of its height, conservative analysts still think it’s expensive, but investors don’t seem to be paying them much heed.”

Josh Sheluk:
We’ve heard this one play out a few times hey Colin?

Colin White:
Absolutely. And it’s the whole, if you don’t learn from history you’re doomed to repeat it. And when anybody starts to talk to me being really super confident that something’s absolutely going to happen or something’s absolutely a good investment. We’ll see. And again, not necessarily calling them bad investments. We’re just saying, keep it in its place. Don’t get so excited about it that it begins to dominate.

Colin White:
You can have a little bit of a good investment and you should be happy with that. And you can get to the point where it becomes a bad investment just because how much you put into it or how much you believed in it. So for me, that’s a cautionary tale. And Nortel wasn’t the only one. There’s a lot of names and depends on who you are, where you are and what your demographic is, geographically and all the rest of it.

Colin White:
But you go through Toys ‘R’ Us. Toys ‘R’ Us was 1948. That was when Toys ‘R’ Us was launched. And they made it till 2017. A dominant player for a long time. It had an online presence. It was going to do all this then whoops, it went away. The Eatons, the Sears, the Hudsons Bay, all these ones that Canadians have seen come and go. I’m pleading with the audience. Just remember every time that you’re really sure about something, think back to all the times you were really sure about things that aren’t around anymore.

Josh Sheluk:
Yeah. The snippet from that Globe article, the thing that at it tells me is just because an investment is down, doesn’t make it a good investment. Right? This is what a lot of people I think, some again without having a process, you can look at well, it was 120 before now it’s 60. Oh, I should definitely buy it. A piece of math that I heard one time that has always stuck with me is, an investment that is down 90% is an investment that was down 80% and then fell by 50% from there.

Colin White:
Wow. You dropped math truth. Wow.

Josh Sheluk:
That one just… It just resonates so much because when you think something’s down 80%, well how much lower can it go? Well, somebody had bought it at 90% is thinking well, how much lower can it go? But it just fell 50% from where it was 10% ago in some ways. So it’s really important to have that methodology, that process. And something being down, it’s not a reason to buy it or to sell it. Suddenly being up, it’s not a reason to buy it or to sell it. So just stop focusing so much on price and I think we’d be better off for it.

Colin White:
Well, no absolutely. Because, you’re right and I want to jump on this point and say, “Yeah, you’re right. People say it’s down. It must be a good buy.” No, stop it. Don’t say that sentence. It’s down. Maybe we could take a closer look at it. All right. Fair enough. Let’s take a closer look at it. And again, that’s what we do.

Colin White:
That’s one of the things we’ll screen for internally is, if there’s something we perceive as being a quality business or a quality whatever and it’s down, hmm. Why is it down? Let’s explore that a little bit. It’s never, “Oh my God it’s down. We have to buy it.” No. It might be down for a reason. It’s always darkest before the dawn or it’s always dark just before the light goes out forever. I mean there’s really… Some things come to an end.

Josh Sheluk:
Both true. So I have one more snippet from this Globe article that I want to read to you. And again, I want to get your senses. Does this remind you of anything that’s a little bit more recent? So a big part of why Nortel was really thriving at the time by the sounds of it, in hindsight anyway, hindsight telling the story, is that there was a lot of deregulation in the industry at the time.

Josh Sheluk:
So the global article says this, “Deregulated industries always followed the same pattern. Competition spurs capital spending, which creates excess capacity, which guarantees price wars, which kill off the weak and damage the industry, stifling profits and choking off new investment.” Sound familiar?

Colin White:
Well all those are some really powerful words. That’s quite the wordsmith there, but what you’re talking is kind of the definition of a free market. If a company has a huge advantage, well there’s going to be a whole lot of people who are trying to erode that. And unless they’ve got some kind of regulatory umbrella protecting them from it. Yeah. Competition’s a thing and competition doesn’t have to be direct competition.

Colin White:
There can be replacement technologies or the whole marketplace could veer in one direction or another. But the regulatory thing is probably the most insidious thing to try to understand from an investment perspective, because it’s something that can be complete nonsensical. It can be something that derails a fundamental aspect of something that has unintended consequences.

Colin White:
And so yeah, the regulatory environment is something that is… A black swan is kind of an exaggeration, but it’s a data point that’s going to have the potential to cause some really major issues and very seldom do they make sense and very seldom are they pre forecast able.

Josh Sheluk:
And very seldom are they predictable? Which is kind of what you need to have for something to be a good investment idea.

Colin White:
If there was only a way to protect yourself. Oh wait there is. Stay diversified.

Josh Sheluk:
That would be my takeaway from this whole conversation, is stay diversified. If you had an investment in Nortel and you were diversified properly, it’s probably not derailing your long term financial wellbeing. If you worked at Nortel and invested your portfolio properly, probably still doing okay today financially. But that lack of diversification can be a killer. And I think when people least expect it to happen, that sort of those catastrophic blows up.

Colin White:
And what I want them to take away from this, is next time you’re sure of something, stop for a second, sit down and do a little bit of soul searching about all the other things you’ve been sure of and then ask yourself, should I really be this sure now?

Colin White:
And if you’re honest about that, hey I could help. When I come in and sit down and have a conversation, we can go back through history together and talk about some of the things you’re probably sure of. And my goal is to make you a little bit less sure of what you think you’re sure of today.

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This information has been prepared by White Leblanc Wealth Planners, who is a portfolio manager for iA Private Wealth. Opinions expressed in this podcast are those of the portfolio manager only and do not necessarily reflect those of iA Private Wealth Inc. iA Private Wealth Inc, is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc operates.

Colin White:
We’ve noticed something. It seems there a lot of people who would rather try to figure out their lives with an online calculator than air your finances to a human. Stop doing that. You need to talk to someone who can help direct you, tell you where to start with what you’ve got to make the biggest impact on your future. You can’t figure that out at doihaveenoughcash.com, but you can figure it out by chatting with us. Call us. It’ll be okay. You’ll see.

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